Japan’s economy and stock market after disaster
On March 11, 2011, the north-east region of Japan was struck by disaster on three fronts. The Great East Japan Earthquake was the most powerful to have hit Japan in its long history. The tremors subsequently triggered an extremely destructive tsunami, with the combined force causing severe and extensive structural damage along the coast and areas further inland. These damages resulted in problems at the Fukushima Daiichi Nuclear Power Plant, where radiological issues persist.
The earthquake occurred about 14 minutes before the close of the Tokyo market on Friday, March 11 and the market reacted dramatically. Stock prices sharply declined in the following week, including a drop of more than 9% in TOPIX (Tokyo Price Stock Price Index) on March 15, the third largest decline in its history. Investors were acting on concerns that Japan might slip back into a recession while the extent of damages caused by the disaster remained unclear.
Looking to economic indicators, the quarterly real GDP growth for the months from January to March 2011 has been estimated at -3.5% on an annually adjusted basis. It was also estimated that the growth rate was - 1.3% during the second quarter of this year (April to June 2011), refmecting a sign of recovery.
The main reason for this is supply constraints arising from the disaster. In addition to the destruction of capital stock, production curtailed by disruptions in the supply chain and power shortages likely caused a contraction of private inventory investment and a drawdown of existing inventories. A slump in individual consumption was also observed on the demand side.
While the growth rate of the overall economy had entered a downward swing during the first half of the year, considerable economic growth can be expected on the back of reconstruction demand in the second half of the year, continuing into 2012.
Even though concerns remain over the damaged nuclear reactors in Fukushima, we are making steady progress toward establishing a solid schedule with the help of the US and France. Actually, atmospheric radiation levels have returned to the pre-quake levels of around 0.06μSV, which is below the average radiation levels in many of the world's major cities. Thus, I would like to highlight the safety and health of Tokyo and our industries.
The disrupted supply-chain is also recovering at a fast pace. Some corporations resumed full operations as early as June. While the economy of the north-east region accounts for no more than 4% of Japan's GDP, the damage is having far-reaching effects on the automotive industries of China and the US. As such, I believe we can view this as proof that Japanese technology is supporting the rapid economic growth of Asia, and China in particular.
There are quite a few comments among analysts that this earthquake could likely become the trigger for Japan to finally exit the deflation of the past two decades. Serious government re-flation tactics, such as large amounts of public stimulus and emergency provision of liquidity have narrowed the output gap, and coordinated intervention by major countries has revived the possibility that the long-term trend of the strong yen may be reversed. Furthermore, emerging from this ordeal, the Japanese people have realized that both private and public sectors need to work together for recovery.
The recovery of the Japanese equity market following the Lehman Shock in 2008 is lagging behind the rest of the world, and the market is thought to be undervalued in the wake of the recent disaster. The majority of analysts predict that recovery will begin in the latter half of this year as I previously mentioned, and that Japanese stocks are on the verge of recovery.
Several economic indicators, such as the Industrial Production Index affirm the view that the speed of the recovery is much faster than expected and there is growing investor confidence in an improvement in corporate earnings. The recent statement released by the Bank of Japan also clearly mentions that Japan’s economic activity is picking up with an easing of supply-side constraints with production showing clear signs of recovery, an upturn in exports and domestic private demand returning to normal.
One notable and favorable fact is that foreign investors were net buyers of Japanese stocks for the 29 consecutive weeks between the first week of November last year to the third week of May this year. In particular, immediately after the earthquake, foreign investor activity amounted to net buying of 950 billion Japanese yen or 11 billion US dollars. On March 15, trading volume in our stock market also reached a record high of 5.7 billion shares, which means that there were a lot of buyers amid massive selling in the market. The effects of the earthquake were very grave, but I believe that one day we will be able to view March 11 as an economic turning point for the recovery of Japanese stock prices.
In fact, Japanese stocks prices are now rebounded and returned to the same levels seen on March 11. In particular, during the recent two-month period, the TOPIX has gained 6.5%, outperforming other Asian markets.
Tokyo Stock Exchange (TSE) played an important role in this swift turnaround. Despite calls from some circles for temporary closure of the market after the earthquake, TSE continued to provide market functions as the primary market for Japanese equities. There was no reason to shut the market.
On March 14, TSE made a public announcement.
“TSE will operate regular trading sessions for stocks, futures, options, and other listed products. The Pacific coast along the Tohoku and Kanto regions of Japan was seriously damaged and many people continue to suffer extreme conditions beyond imagination. However, in an environment where cross-border trading is frequently conducted for stocks, etc., TSE recognizes its expected role to provide opportunities for trading as Japan’s primary market where supply and demand from a large number of investors is pooled. TSE will make efforts toward achieving proper price formation under such circumstances as soon as possible.”
On the following day, I published the following statement.
“The Tokyo stock market has been experiencing sharp drops over the last couple of days. I suspect that this has mainly been caused by increasing concerns about the degradation of social infrastructure following the recent '2011 off the Pacific coast Tohoku Earthquake' and subsequent nuclear power plant accident. Market participants' concerns have also been further accelerated by the conflicting information on these happenings.
However, the overseas media still appreciate the potential power of the Japanese economy, even after the recent earthquake. In fact, the trend in the stock market today and yesterday showed that foreign investors were the net buyers.
I also believe that Japan's experience, knowledge and technologies in the area of recovering from earthquakes should not be underestimated and that the stock market will calm down soon.
Under these circumstances, I believe that the Tokyo Stock Exchange in its role as an important social infrastructure should continue to provide opportunities for stock trading. I would appreciate it if all investors and trading participants would respond in a calm and orderly manner.”
Equipped with a BCP (business continuity plan) and mechanisms to suppress excessive price fluctuation, such as daily price limits, in addition to our highly advanced and reliable trading system, we were able to maintain stable market operations in the midst of great confusion. I am proud to say that our risk management measures have performed admirably in this crisis.
Last but not least, taking this opportunity, I would like to express my sincere appreciation to those who kindly conveyed your warm messages right after the disaster, particularly CEOs and officials of fellow WFE member exchanges.
About Atsushi Saito
Born in October 1939 in Kumamoto prefecture, Mr. Saito graduated from Keio University in 1963 then went on to work at Nomura Securities Co., Ltd. for 35 years. During that time he was stationed twice in New York for a total of 10 years, and in 1986 he was appointed as a member of the board. At Nomura, Mr. Saito worked in Treasury and Fixed Income Dealing and several other divisions, overseeing operations in a broad range of areas from treasury to legal affairs. During his tenure here he served as Deputy President and in many other executive roles.
While in New York in the latter half of the 1980’s, Mr. Saito was actively involved in the securitization of non-performing loans, real estate and commodities, as well as the development and sale of index funds and other products.
He has also committed his efforts to the liberalization of financial services in Japan, participating in the planning of the Japanese financial “Big Bang” policy promoted by the Hashimoto cabinet by acting as a member of several governmental deliberation councils.
After retiring from Nomura, Mr. Saito served successively as President, then Chairman of Sumitomo Life Investment Co., Ltd., where he participated in company administration and the management of 10 trillion yen in pension capital.
In April of 2003, Mr. Saito became president of the Industrial Revitalization Corporation of Japan – a part of the government’s financial revitalization project – where he engaged in many revitalization support programs. While at this corporation, he played a significant role in the resolution of the country’s non-performing loan problem, and blazed a trail for corporate restructuring in the future.
Mr. Saito was appointed President and CEO of Tokyo Stock Exchange, Inc. in June of 2007, and in August of the same year became the first President and CEO of Tokyo Stock Exchange Group, Inc., the holding company for the market operation company and the self-regulation corporation. Many have high expectations for his expertise towards strengthening the international competitiveness of Japan’s financial markets.